December 19, 2013

Having lost to a lender in a state court foreclosure action, a borrower might try to file a separate lawsuit against that lender in federal court. In such instances, lenders and their counsel should be aware of the Rooker-Feldman doctrine, which the United States District Court for the Northern District of Indiana addressed in two separate opinions late last year: Fogarty Street v. Mortgage Electronic Registration System, 2012 U.S. Dist. LEXIS 163804 (N.D. Ind. 2012) (.pdf) and Canen v. U.S. Bank, 2012 U.S. Dist. LEXIS 177992 (N.D. Ind. 2012) (.pdf). Generally, a losing borrower in state court can only appeal. Do-overs in federal court are not allowed.

The situation. Fogarty and Canen followed mortgage loan defaults and state court actions to foreclose. In both cases, the lender had already obtained a state court judgment and foreclosure decree. Instead of appealing, the borrowers filed new lawsuits in federal court asserting a plethora of claims attacking the lenders’ actions in the prior foreclosure cases and/or the servicing of the underlying mortgage loans. The question was whether the federal court cases should be dismissed. Rule 12(b)(1) authorizes the dismissal of complaints “that bring no actionable claim within the subject matter jurisdiction of the federal courts.”

The doctrine. The Rooker-Feldman doctrine “deprives federal courts of subject matter jurisdiction where a party . . . sues in federal court seeking to set aside the state court judgment and requesting a remedy for an injury caused by that judgment.” The law prevents lower federal courts from reviewing state court judgments. Generally “a litigant dissatisfied with the decision of the state tribunal must appeal rather than file an independent suit in federal court.”

Two instances. The Rooker-Feldman doctrine bars federal claims in two instances. The first is when a plaintiff requests the federal court to overturn an adverse state court judgment. Those cases are easy to spot because plaintiff’s claims were “actually raised in the prior state court action.” The second, and more challenging, instance involves claims that were not raised in state court and/or do not on their face require review of a state court’s decision. Here, the test is whether the federal court claims “are inextricably intertwined with the state court determinations.”

If the court determines that a claim is inextricably intertwined, [the court] must then inquire whether the plaintiff did or did not have a reasonable opportunity to raise the issue in state court proceedings. If the plaintiff could have raised the issue in state court, the claim is barred under Rooker-Feldman.

Inextricably intertwined. The Fogarty and the Canen cases provide illustrations of the “inextricably intertwined” concept. In Fogarty, the borrower’s claims of “fraud based robo-signing, voidable transfers of mortgage notes based on lack of authority, and lack of authority due to a lender no longer being in business . . . could and should have been raised in the state court foreclosure proceedings.” In Canen, the borrower asserted a variety of theories why the Court should rescind the underlying loan. But, “the precise issue decided in the foreclosure action was that one or more of the Defendants had a valid security interest in the house and could take possession of it upon [the borrower’s] nonpayment . . .. [R]escinding the loan effectively required [the Court] to vacate the state court foreclosure judgment, which is exactly the sort of action the Rooker-Feldman doctrine forbids.”

Exception. Courts recognize very limited occasions for defendants to sue plaintiffs after the entry of a state court judgment. The Canen opinion shed some light on what might be excluded from the applicability of the Rooker-Feldman doctrine, such as when borrowers allege wrongdoing independent of the prior state court foreclosure action. The doctrine does not apply when plaintiffs are not attacking a state court judgment or when federal claims do “not depend on a determination that the state court erred in deciding the previous action.” But, such a claim cannot attack or otherwise seek to set aside the state court decree. The federal court case truly needs to be an entirely separate and distinct matter. Without doing more research, I honestly can’t envision such a case in the context of a lender/borrower relationship or a foreclosure.

Comments

Having lost to a lender in a state court foreclosure action, a borrower might try to file a separate lawsuit against that lender in federal court. In such instances, lenders and their counsel should be aware of the Rooker-Feldman doctrine, which the United States District Court for the Northern District of Indiana addressed in two separate opinions late last year: Fogarty Street v. Mortgage Electronic Registration System, 2012 U.S. Dist. LEXIS 163804 (N.D. Ind. 2012) (.pdf) and Canen v. U.S. Bank, 2012 U.S. Dist. LEXIS 177992 (N.D. Ind. 2012) (.pdf). Generally, a losing borrower in state court can only appeal. Do-overs in federal court are not allowed.

The situation. Fogarty and Canen followed mortgage loan defaults and state court actions to foreclose. In both cases, the lender had already obtained a state court judgment and foreclosure decree. Instead of appealing, the borrowers filed new lawsuits in federal court asserting a plethora of claims attacking the lenders’ actions in the prior foreclosure cases and/or the servicing of the underlying mortgage loans. The question was whether the federal court cases should be dismissed. Rule 12(b)(1) authorizes the dismissal of complaints “that bring no actionable claim within the subject matter jurisdiction of the federal courts.”

The doctrine. The Rooker-Feldman doctrine “deprives federal courts of subject matter jurisdiction where a party . . . sues in federal court seeking to set aside the state court judgment and requesting a remedy for an injury caused by that judgment.” The law prevents lower federal courts from reviewing state court judgments. Generally “a litigant dissatisfied with the decision of the state tribunal must appeal rather than file an independent suit in federal court.”

Two instances. The Rooker-Feldman doctrine bars federal claims in two instances. The first is when a plaintiff requests the federal court to overturn an adverse state court judgment. Those cases are easy to spot because plaintiff’s claims were “actually raised in the prior state court action.” The second, and more challenging, instance involves claims that were not raised in state court and/or do not on their face require review of a state court’s decision. Here, the test is whether the federal court claims “are inextricably intertwined with the state court determinations.”

If the court determines that a claim is inextricably intertwined, [the court] must then inquire whether the plaintiff did or did not have a reasonable opportunity to raise the issue in state court proceedings. If the plaintiff could have raised the issue in state court, the claim is barred under Rooker-Feldman.

Inextricably intertwined. The Fogarty and the Canen cases provide illustrations of the “inextricably intertwined” concept. In Fogarty, the borrower’s claims of “fraud based robo-signing, voidable transfers of mortgage notes based on lack of authority, and lack of authority due to a lender no longer being in business . . . could and should have been raised in the state court foreclosure proceedings.” In Canen, the borrower asserted a variety of theories why the Court should rescind the underlying loan. But, “the precise issue decided in the foreclosure action was that one or more of the Defendants had a valid security interest in the house and could take possession of it upon [the borrower’s] nonpayment . . .. [R]escinding the loan effectively required [the Court] to vacate the state court foreclosure judgment, which is exactly the sort of action the Rooker-Feldman doctrine forbids.”

Exception. Courts recognize very limited occasions for defendants to sue plaintiffs after the entry of a state court judgment. The Canen opinion shed some light on what might be excluded from the applicability of the Rooker-Feldman doctrine, such as when borrowers allege wrongdoing independent of the prior state court foreclosure action. The doctrine does not apply when plaintiffs are not attacking a state court judgment or when federal claims do “not depend on a determination that the state court erred in deciding the previous action.” But, such a claim cannot attack or otherwise seek to set aside the state court decree. The federal court case truly needs to be an entirely separate and distinct matter. Without doing more research, I honestly can’t envision such a case in the context of a lender/borrower relationship or a foreclosure.